The stock market bounded ahead yesterday as lawmakers looked increasingly likely to reach agreement on the budget. The Standard & Poor’s 500 Index rose 1.7 percent to 1,426.19 at 4 p.m. in New York, bringing the gain for the year to 13 percent.
The biggest hit to the economy from the fiscal package probably will come from the expiration of the payroll tax cut, Feroli said. The payroll tax cut was designed as a temporary measure to boost the economy in 2011 and then was extended through 2012. He reckons that its elimination will slow growth by just over a half percentage point this year by taking $125 billion out of consumers’ pockets.
It “would have a meaningful impact because it hits everybody,” said Michael Gapen, a New York-based senior economist at Barclays Plc. “You’d see it in the first quarter, and consumption would ratchet down.”
Higher taxes on the wealthy, in contrast, won’t have that much of an effect because top earners tend to save more of their income rather than spend it, he added.
Possible federal spending cuts would reduce economic growth by more than a half percentage point if they eventually are implemented, based on estimates by Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. Defense companies such as Northrop Grumman Corp. and Lockheed Martin Corp. could be particularly hard hit.
The deal would prevent automatic spending cuts from taking effect for two months, Senate Republicans told reporters.
The recovery should prove resilient in the face of government belt-tightening because of the progress that the private sector in rebounding from the 2007-2009 recession, said Bank of America’s Harris.
“Both the housing market and the banking sector have healed significantly,” he said.
Residential real estate, which collapsed and helped trigger the 18-month economic downturn that ended in June 2009, is picking up. Existing homes sold at their strongest pace in more than two years in November and building permits reached a four- year high. Companies including Toll Brothers Inc. and KB Home are competing for buildable lots and raising prices.
“We’ve seen a virtuous cycle building in housing,” said Terry Sheehan, an economic analyst at Stone & McCarthy Research in Princeton, New Jersey.
Banks are bouncing back as well, with profits in the third quarter the highest in six years, according to the Federal Deposit Insurance Corp. in Washington.
The number of lenders on FDIC’s confidential list of so- called problem banks -- those deemed to be at greater risk of collapse -- fell from 732 in the second quarter to 694 in the third, the smallest number since a peak of 888 after the financial crisis.
Another encouraging sign: The job market has held up even in the face of concerns about the possibility of higher taxes and government spending cuts in 2013. Payroll gains this year through November averaged about 151,000 a month compared with 147,000 in the same period of 2011.
Labor Department figures due Jan. 4 may show employers added 150,000 jobs in December, about the same pace as the prior month, according to the median forecast of economists surveyed by Bloomberg.
“Underneath the fiscal drama is an improving economy,” said Ryan Sweet, a senior economist at Moody’s Analytics. “The fiscal drag will take some wind out of it but once there is more clarity, we can expect stronger growth.”